Can Amgen Unlock DeCODE's Value?

| About: Amgen Inc. (AMGN)
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The biotech scrap heap isn't always the most promising place to go shopping, but biotech giant Amgen (NASDAQ:AMGN) is going to give it a try, announcing on Monday that it will acquire Iceland's deCODE Genetics for $415 million in cash. That's a pretty stunning reversal for a company that sold for $14 million not so long ago, and it remains to be seen whether Amgen can find the key to unlock the value that many have seen in deCODE's approach for more than a decade.

The Latest In A Series Of Deals

Amgen has opened its wallet in a big way in 2012, starting the year with the $1.2 billion purchase of Micromet, while also committing up to $1 billion for BioVex and $315 million for KAI Pharmaceuticals. Now Amgen is adding deCODE for $415 million. Given that deCODE is privately held, there should be minimal obstacles to getting the deal done, and Amgen management has guided to a close before year-end.

If At First You Don't Succeed, Try, Try Again

It has not been an easy road to this buyout for deCODE. A legacy of the genetics/genomics craze at the beginning of the century, deCODE started with the idea of discovering, patenting and licensing genetic variations and mutations linked to diseases. This was back when analysts were trumpeting the potential of the Human Genome Project to revolutionize drug discovery and unlock billions of dollars worth of new treatments for cancer, diabetes, and so on.

DeCODE wasn't alone, as companies like Lexicon Pharmaceuticals (NASDAQ:LXRX), Human Genome Sciences, Celera and Myriad Genetics (NASDAQ:MYGN) started off with basically similar plans.

Although the company thought it would have a key advantage by basing its work on the population of Iceland (a country with an uncommonly homogenous genetic history and likewise uncommonly strong genealogical records), it found (like everyone else in the sector) that lead discovery was not a viable business model. While the company followed its peers into proprietary drug development, the company made the switch too late (and with too weak of a balance sheet) and went bankrupt in 2009 - only nine years after its IPO.

Two venture capital firms, Polaris Venture Partners and Arch Venture Partners, bought the firm for $14 million in 2010 - a far cry from its peak valuation of over $1 billion. With the Amgen deal, those firms are getting quite a solid return on their approximately two-year investment.

What Does deCODE Bring To The Table?

Although deCODE's original business model was deeply flawed, Amgen may yet be able to derive real value from the company's science and databases. Only recently, the company revealed (in two different papers) that it had identified genetic mutations that appeared to confer protection against Alzheimer's disease and significantly increase the risk of Alzheimer's.

This work was done in partnership with Roche (OTCQX:RHHBY) and Illumina (NASDAQ:ILMN), respectively, but the company has also made recent discoveries in cancer (including a gene tied to an eightfold risk of ovarian cancer) and autism. What's more, the company has also managed to secure partnerships, including an 18-month partnership with Pfizer (NYSE:PFE), to investigate leads related to Lupus.

While deCODE has revealed less about its pipeline since going private, I seriously doubt Amgen is acquiring deCODE for any near-term pipeline opportunities. Rather, this acquisition is much more likely to be part of Amgen's basic science and lead identification efforts. Coupled with Amgen's proven capabilities in drug design/development, this could be a powerful source of leads and future revenue, but likely not for at least a decade.

The Bottom Line

At the risk of still being too enamored of the potential of deCODE's basic approach, I like this deal for Amgen. At a time when so many other pharmaceutical companies have effectively gutted their basic science R&D, Amgen is investing in theirs. While this does lead to higher ongoing R&D costs, it does offer the potential of proprietary internal "cradle to grave" product development, whereas companies without these basic capabilities are more dependent on forging licensing deals with universities or independent biotechs.

It's a trade-off, then, between steady ongoing internal investment and periodic splashy licensing deals (often with sizable upfront costs). All in all, I believe it's a trade-off that favors those companies conducting basic science, and I do believe that Amgen's acquisition of deCODE is a worthwhile risk for the long-term benefit of better internal drug development opportunities.

Disclosure: I am long LXRX, OTCQX:RHHBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.